B2: Strategic Planning: Forecasting, Budgeting, and Analysis Flashcards
Cost Volume Profit (CVP) Analysis For Decision Making
used by managers to forecast profits at diff levels of sales and production volume
- breakeven point: when revenues = total costs
- aka breakeven analysis
Assumptions
Cost Volume Profit (CVP) Analysis For Decision Making
General Assumptions*
- all costs are either variable or fixed costs
- volume is the only factor affecting cost
- costs behave in a linear fashion in relation to production volume
- cost behaviors anticipated to remain constant over the relevant range because there is an assumption that the efficiency of production does not change
- costs show greater variability over time; the longer the time, the greater the % of variable cost; the shorter, the greater the % of fixed costs
Use of Single Product
- CVP can be performed for more than 1, but in it’s simplest form, the model assumes product mix remains constant
Contribution Approach (Direct Costing) Used instead of Absorption Approach (GAAP) - * sales - variable costs - fixed costs = profit
Selling Prices Remain Unchanged
- the volume of transactions produces a uniform contribution margin per unit and predictable projected contribution margin based on volume
Absorption Approach
Absorption Approach vs Contribution Approach
Cost Volume Profit (CVP) Analysis For Decision Making
- GAAP
- does not segregate fixed and variable costs
- matching principle
Revenue
less: COGS (product cost/DM+DL+OH fixed and var)
= Gross Margin
less: Operating Expenses (period cost/SGA fixed and var)
= Net Income
Contribution Approach
Absorption Approach vs Contribution Approach
Cost Volume Profit (CVP) Analysis For Decision Making
- aka variable costing aka direct costing
- useful for internal decision making
Presentation
- Total or Per Unit
- revenue, var. costs, and CM may be expressed in total or per unit - Unit Contribution Margin = sales/unit - VC/unit
Contribution Margin Ratio* = CM / Revenue
Revenue less: Variable Costs (DM + DL + var. OH + var. SGA) = Contribution Margin less: Fixed Costs (fixed OH + fixed SGA) = Net Income
Absorption Approach vs Contribution Approach
Cost Volume Profit (CVP) Analysis For Decision Making
1 difference: treatment of fixed factory OH
- SGA are period costs under both methods
Treatment of Fixed Factory OH
- Absorption- Product Cost
- COGS = DM + DL + OH (fixed and variable)
- all fixed OH is product cost, COGS includes both fixed and variable - Contribution- Period Cost
- all fixed OH is period cost, expensed in period incurred
- inventory only includes variable OH so COGS does too
- not matching, that’s why not GAAP
Treatment of SGA Expenses
- period costs under both methods
Gross Margin vs Contribution Margin
Fixed OH differences Pass Key
Absorption Approach vs Contribution Approach
Cost Volume Profit (CVP) Analysis For Decision Making
Absorption Costing
- fixed OH of all units sold in product costs
Variable (Direct) Costing
- fixed OH of all units produced in period costs
- even if not sold
Effect on Income
Absorption Approach vs Contribution Approach
Cost Volume Profit (CVP) Analysis For Decision Making
if production = sales: no difference in NI
if production > sales: absorption NI > variable NI
- inventory increases
- in absorption, some fixed OH is included in inventory but in variable, all fixed OH is expensed
if production < sales: absorption NI < variable NI
- inventory decreases
- in absorption, fixed OH carried over from a pervious period as part of beg. inventory is charged to cost of sales
- in variable, those fixed costs were charged in a prior period when incurred
Benefits and Limitations of each
Absorption Approach vs Contribution Approach
Cost Volume Profit (CVP) Analysis For Decision Making
Absorption Costing Benefits - GAAP and required by IRS Limitations - **NI under absorption is less reliable (especially for use in performance evaluations) than variable bc cost of product includes fixed costs and therefore, the level of inventory affects NI
Variable Costing
Benefits
- variable and fixed costs are separated and can be easily traced to and controlled by mgmt
- NI is more reliable than under absorption
- isolates contribution margin to aid in decision making
Limitations
- not GAAP
- IRS doesn’t allow
Breakeven Computation*
Cost Volume Profit (CVP) Analysis For Decision Making
Breakeven = Sales - VC - FC = Profit
CM = Sales - VC
- * always use pre-tax profit
Breakeven Analysis: determines the sales required (in $s or units) to achieve 0 profit or loss from operations
Breakeven Point in Units
= total fixed costs / CM per unit
Breakeven Point in $s
- CM per unit
- breakeven point = unit price * breakeven points in units - CM Ratio
- breakeven point = total fixed costs / CM ratio
- CM ratio = CM / revenue
Required Sales (in $s and units) for Target Profit
Cost Volume Profit (CVP) Analysis For Decision Making
- must be pre-tax profit
Sales Units Needed for Desired Profit
= (fixed cost + pretax profit) / CM per unit
Sales $s Needed for Desired Profit
- summation of total costs and profits
- sales dollars = variable costs + fixed costs + pretax profit - CM ratio
- sales dollars = (fixed costs + pretax profit) / CM ratio
Predicting Performance Based on Volume
Cost Volume Profit (CVP) Analysis For Decision Making
Predicting Profits Based on Volume
- after breakeven has been achieved, each add. unit sold will increase NI by the amt of CM per unit
Setting Selling Prices
- sales price per unit = (fixed costs + var. costs + pretax profit) / # of units sold
Margin of Safety
Cost Volume Profit (CVP) Analysis For Decision Making
= excess of sales > breakeven sales
- in dollars
total sales $s - breakeven sales (in $s) = margin of safety - in %
margin of safety in dollars / total sales = margin of safety %
Target Costing
used to establish the product cost allowed to ensure both profitability per unit and total sales volume
- sales price given
- target cost = market price (given) - required profit
Implications ~
- if mgmt commits to a target cost, serious measures must be employed to reduce costs
- compromised quality
- increased marketing and downstream costs
- increased complexity in cost measurement- to attain a higher productivity level
- product redesign
Transfer Pricing (Non-Global Perspective)
transfer price is price charged for sale/purchase of a product internally
- price set determines revenue for selling and cost of purchasing
- selling division wants higher price and purchasing wants lower price
- Negotiated Price
- selling division will not accept price lower than variable cost to produce and sell the product
- purchasing will not accept price higher than market price - Market Price
- if outside market exists
- price could be reduced by selling division due to costs saved from not having to market or distribute - Cost
- at least variable costs + possibly fixed OH + possibly reasonable profit markup
- when no outside market exists
Transfer Pricing (Global Perspective)
concern from tax authority is that a comp will assign revs and exps to show lowest profit (biggest loss) in high tax jurisdiction and highest profit in lowest tax jurisdiction
Arms Length Principle
- transfer prices must approximate prices for comparable transactions b/w unrelated parties
to determing comparability, assess:
- nature of goods, services or property
- B2-14
2 categories of methods: Transactional and Profitability
- Transactional required identification of comparable transactions
- Profitability used when identifying comparable transactions is not feasible
Penalties, Rules, Adjustments
- in US, the IRS has authority to adjust prices not found to be established at arm’s length
- adjustment can be to midpoint of range and a penalty may be assessed depending on size of adjustment
Transactional Methods
Transfer Pricing (Global Perspective)
Comparable Uncontrolled Price (CUP)
- CUP identified an identical transaction
- best estimated of arm’s length
Resale Price Method
- list price less a discount % from retail sales to unrelated parties
Gross Margin
- similar to resale price method, but used for transactions involving services
Cost Plus (C+)
- looks at markup % applied on actual costs on transactions b/w unrelated parties
- an average markup is determined and applied
Profitability Methods
Transfer Pricing (Global Perspective)
Comparable Profits Method
- companies in similar situations and industries to determine profit margins
Transactional Net Margin Method
- looks at individual transactions (or groups) from a profitability perspective (rather than price) and applies that profitability
Profit Split Method
- based on evaluating the contribution of each tested party to the combined operating profit or loss of the entity as a whole
1. Comparable Profit Split - combined operating profit of uncontrolled taxpayers w similar transactions to allocated combined operating profit
2. Residual Profit Split - when 1 party owns majority of intangible assets
- profit split based on functions performed by party that does not own intangible assets, residual allocated to other party
Marginal Analysis and Definitions
is the operational decision method used when analyzing business decisions
- only considers relevant revenues and costs associated w a decision
Relevant Revs and Costs
- relevant only if they change as a result of selecting different alternatives
- can be fixed or variable, but more likely variable bc change w production volume and output
Direct Costs: can be traced to a cost object
- usually relevant (variable costs gr direct costs)
Prime Costs: DM + DL
- gr relevant
Discretionary Costs: costs from periodic budgeting decisions by mgmt to spend in areas not directly related to manufacturing
- relevant
Incremental Costs
- aka marginal costs
- add. costs to produce add. amt of unit
- relevant and include all variable costs and any avoidable fixed costs
Opportunity Costs
- cost of foregoing next best alternative when making a decision
- always relevant
Irrelevant Costs
- costs that do not differ among alternatives are ignored
Sunk Costs
- unavoidable bc incurred in the past and can not be recovered
- not relevant costs
Controllable Costs
- authorized by decision maker
- relevant if they will change as a result of selecting diff alternatives
- uncontrollable costs are not relevant
Avoidable Costs and Revs
- result from choosing one course of action instead of another
- relevant
Unavoidable Costs
- not relevant
Special Order Decisions
Marginal Analysis
decide whether a specially priced order should be accepted or rejected
- decision rule: accept if price > relevant cost
Capacity Issues
- fixed costs gr not relevant to these decisions unless special order will change total fixed costs
a) Excess Capacity: accept if price > VC/unit
b) Full Capacity: accept if price > VC/unit + opp cost/unit - opp cost/unit = total CM given up / size of special order
Strategic Factors
- B2-19
Make vs Buy
Marginal Analysis
decision rule: make if relevant costs < outside purchase price
Excess Capacity
- relevant costs = avoidable costs
Full Capacity
- relevant costs = avoidable costs + opportunity costs
Strategic Factors
- B2-20
avoidable costs
fixed costs that could be eliminated
Sell or Process Further
Marginal Analysis
decision rule: process further if incremental revenue > incremental costs
Joint Costs
- considered sunk costs, not relevant!
Separable Costs
- costs incurred after split-off point
- relevant
Keep or Drop a Segment
Marginal Analysis
Classification
- fixed costs associated w the segment must be identified as avoidable (relevant) or unavoidable, even if seg. is discontinued
Decision
- keep if lost contribution margin > avoided fixed costs
- aka cost to give up > benefit
Strategic Factors
- B2-23
Sensitivity Analysis
Decision Models
risk mgmt tool that is used to test the effect of specific variables on overall profitability
- used to determine which variables are most sensitive to change and will have biggest impact on bottom line
B2-24
Scenario Analysis
Decision Models
budgets will be prepared under each scenario and then probabilities are assigned in order to come up w weighted totals
Forecasting Analysis
Decision Models
extension of sensitivity analysis
Purpose
- involves predicting future values of a dependent variable using past info
a) Forecasting Revenues - sales are a dependent variable that may be a by product of independent variables like expectations regarding the economy, personal income, etc
b) Forecasting Expenses - total costs is a dependent variable that may be a by product of ind. variables like overall fixed costs and per unit variable costs
Regression Analysis
linear regression is a method for studying relationship b/w 2+ variables
- one use is to predict value of dependent variable corresponding to given values of independent variables
- TC = FC + (vc/unit * units produced)
Simple Linear Regression Model
Regression Analysis
only 1 independent variable
y = a + Bx
- assumption: increase in # of units produced increases total costs
y: dependent variable (TC)
x: independent variable (units produced)
a: y-axis intercept of regression line (FC)
B: slop of regression line (vc/unit)
Statistical Measures to Evaluate Regression Analysis
Regression Analysis
Coefficient of Correlation (r)
- measures the strength of the linear relationship b/w the independent var (x) and dependent var (y)
- range of r is from -1 to 1
a) perfect positive correlation +1 - TC function is positive correlation 1
- the depend. and independ. variables move together in same direction
b) perfect inverse correlation -1 - dep and indep. variables move in equivalent opposite directions
c) no correlation 0 - dep and indep. variables are not relatd in a linear fashion
Coefficient of Determination (R^2)
- proportion of total variation in the dependent variable (y) explained by the independent variable (x)
- value lies b/w 0 and 1
- the higher the R^2, the better fit of the regression line
Learning Curve
Regression Analysis
based on premise that as workers become more familiar w a specific task, the per-unit labor hours will decline w experience and efficiency
B2-28
High-Low Method
Regression Analysis
simple technique used to estimate the fixed and variable portions of cost, usually production costs
- compare high and low volumes and costs
- outliers are eliminated
- divide diff b/w high and low dollar total costs by diff in high and low volumes = vc/unit
- use either high volume or low volume to calculate variable costs by multiplying the volume * vc/unit
- subtract total calculated variable costs from total costs to obtain fixed costs
Flexible Budget Formula
- flexible budget: series of budgets prepared for a range of activity levels rather than a single activity
- TC = FC + (vc/unit * # of units)
Optical and Tactical Planning
Budgeting
process of determining the specific objectives and means by which strategic plans will be achieved
- tactical plans are ST and cover periods up to 18 months
Single Use Plans
- aka tactical plans
- developed to apply to specific circumstances during a specific time frame
Annual Budget
- type of single-use tactical plan
- budgets translate the strategic plan and implementation into a period-specific operational guide
- placing responsibility for achievement of strategic goals in hands of managers promotes routine accomplishment of strategy as part of manager’s job function
Budget Policies
Budgeting
to effectively budget, an org should implement a formal budget policies that include the following key features
Management Participation
- budget committee includes members of senior mgmt
- resolves disputes and makes final decisions regarding major budget changes
Budget Guidelines
- Evaluation of Current Conditions
- Mgmt Instructions
- B2-31
Standards and Benchmarking
Budgeting
aka per-unit budgets
- integral to development of flexible budgets
Ideal and Currently Attainable Standards
- standards often set below expectations to motivate productivity and efficiency, but must be revised periodically
1. Ideal Standards: costs that result from perfect efficiency and effectiveness in job performance - not historical; forward looking
- no provision made for normal spoilage or downtime
- advantage: emphasis on continuous quality improvement
- disadvantage: demotivation of employees by unattainable standards
2. Currently Attainable Standards - costs that result from work performance by employees w appropriate training/experience but w/o extraordinary effort
- provisions made for normal spoilage and downtime
- advantage: perception standards are reasonable
- disadvantage: required use of judgement and potential manipulation
Authoritative and Participating Standards
- Authoritative Standards
- set exclusively by mgmt
- advantage: efficient
- disadvantage: workers might not accept - Participative Standards
- set by both managers and employees
- advantage: workers more likely to accept
- disadvantage: slower to implement, not as efficient
Master Budget General
Budgeting
documents specific ST operating performance goals for a period, normally one year or less
- usually includes an operating (nonfinancial) budget as well as a financial budget
- aka annual business plan, static budgets, profit planning, targeting budgets
- particularly useful in mfg setting
Components
- pro forma FSs: BS, IS, and CF
- assumptions: schedules that reflect underlying operating assumptions that produce those statements
Limitations of Annual Plan
- master budget confined to 1 year at a single level of activity*, may be much diff than actual results
- best when combined w flexible budgets
Mechanics of a Master Budget- Overview
Budgeting
- Operating Budgets
- established to describe resources needed and manner in which those resources will be acquired
a) sales budgets
b) production budgets
c) selling and admin. budgets
d) personnel budgets - Financial Budgets
- detailed sources and uses of funds to be used in operations
a) pro forma FSs
b) cash budgets
Sales Budget
Operating Budgets
Budgeting
the foundation of the entire budget process
- first budget prepared and it drives development of most other components of master budget
Sales Forecasting
- sales budget is based on sales forecast
- sales forecasts derived of all kinds of input info both internal and external
- B2-35
Production Budget
Operating Budgets
Budgeting
broken up into separate budgets form DM, DL, and factory OH
- the amt of production budget is based on amts of inventory on hand and inventory necessary to sustain sales
Establishing Req. Lvls of Production
- budgeted sales + desired end. inv. - beg. inv = budgeted production*
- other factors impacting production budget B2-38
DM Budgets
Production Budget
Operating Budgets
Budgeting
- DM Purchases Budget
- represents dollar amt of purchases of DM req. to sustain production requirements
a) # of units to be purchased = units of DM needed for production period + desired end. inv at end of period - beg. inv at beg of period
b) cost of DM to be purchased = # of units to be purchased * cost per unit - DM Usage Budget
- represents # of units of DM required for production along w related cost of those DM
- DM usage (cost of materials used) = beg. inv at cost + purchases at cost - ending inv at cost
- purchases budgets are influenced by mgmt’s philosophy regarding req. inventory levels, including safety stock and stockout decisions
DL Budget
Production Budget
Operating Budgets
Budgeting
anticipate hours and rates to meet production requirements
- total wages = budgeted production (in units) * hours req. to produce each unit = total # of hours needed * hourly wage rate
Factory OH Budget
Production Budget
Operating Budgets
Budgeting
includes fixed and var. production costs that are not DL or DM
- applied to inventory based on representative statistic (cost driver)
- frequently, the rate applied is using DL hours
Cost of Goods Manufactured and Sold Budget
Production Budget
Operating Budgets
Budgeting
Calculation
same as last lecture B2-41
COGS and Pro Forma
- budgeted COGS feeds directly into pro forma IS
- budged COGS is matched w budged sales as basis for budgeted gross margin
Selling and Admin. Expense Budget
Operating Budgets
Budgeting
selling and admin expenses represent fixed and var. nonmanufacturing expenses anticipated during the budget period
- examples B2-42
Pro Forma
- selling and admin expenses are not inventoried and are budgeted as period costs
- matched against budgeted sales, thus carried forward into pro forma IS
Cash Budgets
Financial Budgets
Budgeting
detailed projections of cash receipts and disbursements
- provide mgmt w info regarding availability of funds for use
- divided into 3 major sections: cash available, cash disbursements, and financing
- Cash Available
a) Cash Balance: beginning cash
b) Cash Collections: 2
- cash sales from current period and
- collection of AR from prior period - Cash Disbursements: 2
- cash paid for current period expenses
- cash paid on AP/accruals from prior periods
- cash disbursements budgets eliminate noncash operating expenses (like depreciation) - Financing
- consider the manner in which operating (line of credit) financing will be used to maintain min. cash balances or manner in which excess or idle cash will be invested to ensure liquidity and returns
Cash Budget Formats
beginning cash
+ cash collections from sales
- cash disbursements for purchases and operating exps
= computed ending cash
- cash req. to sustain operations
= working capital loans to maintain cash req.
Pro Forma Financial Statements ~
Financial Budgets
Budgeting
- Pro Forma IS
- key components include data from operating budgets:
- sales budget
- COGS budget (derived from production budget)
- selling and admin expense budget
- interest expense budget (from cash budget) - Pro Forma BS
- display balances of each BS acct
- adjusted for cash collections and disbursements associated w cash budget and noncash transactions accounted for in IS - Pro Forma Statement of Cash Flows
- derived from the budgeted IS, the current and previous budgeted BSs, and reconciled to the cash budget
- displays cash effects of master budget on actual cash flows, assisting in determination of whether add. sources of financing are required and evaluating optimal use of trade credit
Capital Budgets
Budgeting
identify and allow mgmt to evaluate the capital additions of the org, often over multiyear period
- financing is a significant component
- detail the planned expenditures
- highly dependent on availability of cash or credit
Pro Forma BS - addition to capital equipment - related debt Pro Forma IS - depreciation and interest expense Cash Budget - planned financing expenses - principal repayments
Flexible Budgeting
Budgeting
financial plan prepared in a manner that allows for adjs. for changes in production or sales and accurately reflects expected costs for the adjusted output
- use in conjunction w master budget
- analysis focuses on substantive variances from standards rather than just changes in volume or activity
Assumptions and Uses
- uses per unit amts: revenue per unit, vc per unit, fixed costs over relevant range
- consider amt of cost per unit allowed for units of output
Benefits
- can display different volume levels w/i relevant range (sales) to pinpoint areas in which efficiencies have been achieved or waste has occurred
Limitations
- highly dependent on accurate identification of fixed and variable costs and determination of relevant range
- e.g. B2-48 everything but fixed costs changes to relevant range
Actual vs Plan
Variance Analysis
variance analysis is used for planning and control purposes, and can be used to evaluate revenue and costs
Performance Report (step 1: budget vs actual)
- actual results easily compared w budgeted
- usefulness is limited by existence of budget variances that may be strictly related to volume
Use of Flexible Budgets to Analyze Performance
- more sophisticated
- allows managers to identify how an individual change in a cost or revenue driver affects the overall cost of a process
- scale everything except fixed costs
- diff b/w flexible and master budget to get change strictly from volume
- flexible budget variance is diff b/w flexible budget and actual results, unexplained variances not from volume
example B2-50 is good, watch with lecture B2??
Standard Costing System
Variance Analysis Using Standards
standard costs, in the aggregate, measure the costs the firm expects that it should incur during production
- most common cost-measurement systems
- standards costs used for all manufacturing costs
- Direct Costs
- standard direct costs = standard price * standard qty - Indirect (OH) Costs
- standard application rate * standard qty
Purpose
- cost control
- data for performance evaluations (variance analysis)
- ability to learn from standards and improve processes
Variance Calculations Using Standards
Variance Analysis Using Standards
Standard Cost Objectives
- to attain a realistic predetermined or budgeted cost for use in planning and decision making
- also greatly simplifies bookkeeping procedures
Evaluating Variances From Standard
- differences b/w actual amts and standards are variances
- favorable or unfavorable
- controllable variance: if variance could have been prevented (vs unfavorable)
typical variances: Product Costs
- DM
- DL
- VOH
- FOH
DM and DL Variance
Variance Analysis Using Standards
2 variances typically calculated: price (or rate) variance and quantity (or efficiency) variance
- may be approached in 2 ways: equation or tabular format
- Equation Format
- DM price var = actual qty purchased * (actual price - standard price)
- DM qty usage var = standard price * (actual qty used - standard qty allowed)
- DL rate var = actual hrs worked * (actual rate - standard rate)
- DL efficiency var = standard rate * (actual hrs worked - standard hours allowed) - Tabular Format
- variance is computed by comparing 2 totals
- DM price variance is diff b/w (actual qty purchased * actual price) and (actual qty purchased * standard price)
- DM qty usage var is diff b/w (actual qty used * standard price) and (standard qty allowed * standard price)
- DL rate var is diff b/w (actual hours * actual rate) and (actual hours * standard rate)
- DL efficiency var is diff b/w (actual hrs * std rate) and (std hrs allowed * std rate)
Mfg OH Variance
Variance Analysis Using Standards
T Chart
- debit balance: underapplied, unfavorable
- credit balance: overapplied, favorable
- left is actual costs, right is applied costs
- overapplied is favorable bc it will ultimately result in a credit to COGS at end of period thus reducing expenses and increasing profits
- the sum of all variances (4 OH vars) equals the net balance in the OH account
2 Variances
- VOH variance
- rate (spending) var = actual hrs * (actual rate - std rate)
- efficiency var = std rate * (actual hrs - std hrs allowed for actual production volume) - FOH variance
- budget (spending) var = actual FOH - budgeted FOH
- volume variance = budgeted FOH - std FOH cost allocated to production (based on actual production * std rate); aka production volume variance
- production volume variance = (actual production - budgeted production) * per unit std fixed OH rate
- they can be combined for calculation purposes, but serve diff functions from a strategic/analytical perspective
Application of OH
- when standard costing is used, application of OH is 2 steps
1. calculated OH rate = budgeted OH / est. cost driver
2. applied OH = standard cost driver for actual level of activity * OH rate (from step 1)
Sales and Contribution Margin Variances
Variance Analysis Using Standards
used to evaluate effectiveness of entity’s identification of target markets and strategies to capture those markets
- sales variances (diff b/w actual sales rev and budgeted rev) has various components
- Sales Price Variance = (actual SP/unit - budgeted SP/unit) * actual sold units
- aka revenue variance - Sales Volume Variance = (actual units sold - budgeted units sold) * std CM per unit
- CM uses budgeted sales price
- for a company that produce more than 1 product, sales volume variance can be divided into: sales quantity variance and sales mix variance
Types of Responsibility Segments
Organizational Units
Responsibility Accounting
responsibility segments, aka strategic business units (SBUs), are gr classified by 4 financial measures (performance objectives) for which managers may be held accountable
- establish accountability for financial responsibility and scorecards
1. Cost SBU: controlling costs
2. Revenue SBU: generating rev
3. Profit SBU: producing target profit (accountability for both costs and revenue)
4. Investment SBU: return on assets invested to produce earnings (cost, rev, profit, and capital investment)
Establishing Designs for Financial Scorecards
Organizational Units
Responsibility Accounting
- must be accurate and timely to be effective
- must be understandable to receiver
- each SBU is often subdivided into additional categories: product lines, geographic areas, major customer
Accounting Decisions- Allocation of Common Costs
- managers have control over variable costs and controllable fixed costs
- performance evaluations should factor in those costs ^
- common costs are not controllable
- allocation of central admin costs must be understood by responsible managers and must be fair and logical
Analysis of Business Performance- Contribution Reporting
Responsibility Accounting
contribution reporting formats gr used to clearly show the degree to which the profit that SBUs generated covered variable or controlled costs
Contribution Margin
- revenues - variable costs
- aka contribution to fixed costs
Controllable Margin
- refinement of CM
- represents diff b/w FM and controllable fixed costs
- controllable fixed costs: costs managers can influence in less than 1 year
Balanced Scorecard
Responsibility Accounting
gathers info on multiple dimensions of an org’s performance defined by critical success factors
critical success factors are classified as: “FICA”
- Financial: responsibility segment/SBU
- Internal business processes: efficient/effective operations
- Customer satisfaction: target markets
- Advancement of innovation and HR development: learning and growth, employees happy
typically, the scorecard describes the classifications of critical success factors, the strategic goals, the tactics, and the related measures associated w strategic and tactical goals
for SR profit maximization use the
greatest CM per unit/hour
implicit vs explicit costs
implicit costs are opportunity costs
- ignored in financial accounting (e.g. profit)
